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Zacks Industry Outlook Highlights: Valero Energy, HollyFrontier, Murphy USA and Delek US

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For Immediate Release

Chicago, IL – December 23, 2021 – Today, Zacks Equity Research discusses Oil & Gas - Refining & Marketing, including Valero Energy Corporation VLO, HollyFrontier Corporation , Murphy USA Inc. (MUSA - Free Report) and Delek US Holdings, Inc. (DK - Free Report) .


Of late, there have been a lot of uncertainties surrounding the Zacks Oil and Gas - Refining & Marketing industry, with the Omicron variant clouding the demand outlook. But there’s no doubt that the space has bounced back from last year's pandemic-driven slump. In particular, easing mobility restrictions and rising vaccination rates should help operators like Valero EnergyHollyFrontierMurphy USA and Delek US.

Industry Overview

The Zacks Oil and Gas - Refining & Marketing industry consists of companies involved in selling refined petroleum products (including heating oil, gasoline, jet fuel, residual oil, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay, and gypsum). Some of the companies also operate refined products’ terminals, storage facilities and transportation services.

The primary activity of these firms involves buying crude/other feedstocks, and processing them into a wide variety of refined products. Refining margins are extremely volatile and generally reflect the state of petroleum product inventories, demand for refined products, imports, regional differences, and capacity utilization in the refining industry. Other major determinants of refining profitability are the light/heavy and sweet/sour spreads. Refiners are also prone to unplanned outages.

3 Trends Defining the Oil and Gas - Refining & Marketing Industry's Future

A Solid Demand Backdrop: Of late, refiners have been supported by improvement in refined products consumption — primarily gasoline and diesel — on the back of increasing vaccinations and mobility. Per the U.S. Energy Department's latest release, gasoline inventories are around 6% below the five-year average, signaling robust oil product usage in the market.

In particular, the last four-week average for petroleum demand stands at an all-time high of 23.2 million barrels a day, nearly 20% above the year-ago levels. This indicates surging consumption of gasoline, diesel and other refined products. As economic activity takes off and Americans take to the road with a vengeance, refined products usage should continue to gain traction throughout 2022.

Omicron Outbreak Adds Uncertainty: While refining fundamentals have certainly brightened from last year, the sector is not out of the woods yet in terms of cash flows that remain anemic and well below the pre-crisis levels. There are also jitters associated with the proliferation of the Omicron variant, which spurred a flurry of renewed curbs by governments to check its spread, posing a risk to consumption. This will not only affect refining profitability but also result in increased price volatility.

Supply Chain Bottlenecks, Inflation in Focus: Despite the bullish energy landscape and improved demand environment in the United States, the industry is not immune to supply chain disruptions and cost inflation. Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited the refiners’ ability to ship packaged volumes to their customers.

Most operators have also felt the impact of inflation, which is rolling through the cost structure. What’s worse is that these headwinds across the system and the subsequent hit to profitability (due to difficulty in passing through the increased costs to clients) are expected to continue in the near future.

Zacks Industry Rank Indicates Gloomy Outlook

The Zacks Oil and Gas - Refining & Marketing is a 14-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #194, which places it in the bottom 23% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates challenging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and its current valuation first.

Industry Outperforms Sector & S&P 500

The Zacks Oil and Gas - Refining & Marketing industry has fared better than the broader Zacks Oil - Energy sector as well as the Zacks S&P 500 composite over the past year.

The industry has grown 31.9% over this period compared to the S&P 500’s rise of 25.9% and the broader sector’s increase of 28.7%.

Industry's Current Valuation

Since oil and gas companies are debt laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of noncash expenses.

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 13.69X, lower than the S&P 500’s 15.36X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 4.31X.

Over the past five years, the industry has traded as high as 159.44X, as low as 4.29X, with a median of 9.71X.

4 Oil and Gas - Refining & Marketing Stocks to Focus On

Valero Energy: Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.1 million barrels per day in its 15 refineries located throughout the United States, Canada and the Caribbean. The majority of VLO’s refining plants are located in the Gulf coast area, from where there is easy access to the export facilities.

Valero has an expected earnings growth rate of 138.1% for the current year. The Zacks Rank #3 (Hold) VLO’s strong third-quarter results were supported by increased refinery throughput volumes and a higher refining margin. So far this year, Valero shares are up 33.2%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

HollyFrontier: HollyFrontier is one of the largest independent oil refiners in the United States, with a combined crude oil processing capacity of approximately 405,000 barrels per day. A major advantage for HFC is the high complexity index — or the capability to process a wide mix of crude — and access to some of the fastest-growing domestic markets afforded by its portfolio of four refineries.

HollyFrontier, which beat third-quarter earnings estimates on better-than-expected refinery gross margins, has an expected earnings growth rate of 351.7% for the current year. HFC carries a Zacks Rank #3 and its shares are up 26.4% since the beginning of 2021.

Murphy USA: It is a leading independent retailer of motor fuel and convenience merchandise in the United States. The proximity of Murphy USA’s fuel stations to Walmart supercenters helps the company to leverage the strong and consistent traffic that these stores attract. MUSA’s acquisition of QuickChek Corporation — a family-owned food and beverage chain located — is expected to help the company improve its offerings.

Over the past 60 days, this El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2021 improve 7.9%. MUSA, which surpassed third-quarter bottom-line estimates on higher retail gasoline price and contribution from the QuickChek acquisition, carries a Zacks Rank of 3 and its shares are up 50.6% year to date.

Delek US Holdings: Delek US Holdings is a diversified downstream energy company with an impressive profile of strategically located assets. DK’s refineries have a combined crude throughput capacity of 302,000 barrels per day. Delek’s retail segment seems to be a bright spot. Since 2016, the unit’s adjusted earnings per store have witnessed a CAGR of 18%. What's more, DK plans to add 50 stores by 2025 to double its segment earnings to $100 million.

Delek, whose stronger-than-expected refining contribution led to the third-quarter earnings beat, has an expected earnings growth rate of 53.5% for the current year. The #3 Ranked DK’s shares are down 5.1% so far this year.


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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit information about the performance numbers displayed in this press release.

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